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Key Play For 2024
Kenya Power
The stock that everyone loves to hate.
FY23 EPS: (1.64)
Current Share Price: 1.6
P/E rato: NIL
Dividend pay out ratio: NIL

Tail winds
1.New tariffs – Average charge per unit will be up by at least 40% (consumption charge excluding FCC,FERFA,IA etc) this goes directly to KPLC. Margins doubled at half year as compared to the 2022 election tariff. 2nd half % growth will be lower since new tariffs commenced on April.

2. EPRA approved recovery of 6.5bn for tariff cut extension. Half of it will be in FY24 so that’s an extra 3.2bn

3. Heavy recovery of forex charges – In FY23 there was a 5bn charge in the cost of sales related to unrealized forex costs that wasn’t recovered due to lack of dollars for payment. KP had to eat up the cost. Currently in FY24, H2 forex recoveries as of April are already 40% higher than H1 indicating heavy recoveries in H2.

4. $/Ksh rate – If by June 30th the rate of dollar to ksh sticks to 140 and below, there will be very little unrealized for losses for the year. Assuming costs don’t skyrocket and gross profit at H2 is similar to H1, EPS should be approx 5 when rate is at 150, 3 when at 160 and sinks into losses past 170.

5. Cashflows – For the past 2 financial years KP has had really amazing cashflows. Now sitting at almost 20bn as at Dec 2023. I expect at least 2bn in interest income

6. Transfer of assets to Ketraco – KP CEO & CFO revealed they rarely revalue their assets eg land. Hence valuations are very highly muted. The transfer wipes out 80bn in debt. Commercial debt stands at 36bn. I wonder if this will trigger a forex loss recovery that has accumulated to over ksh20bn. Either way less interest charges and unrealized forex loss charge.

7. Good rains – From November to date, the more margin rich hydro power is being dispatched over thermal. There is more curtailment of wind & geothermal in favor of hydro. Wind is low margin.

8. Debt recovery – Defaults are over 35bn and there was a provisions charge of 2bn. A tender was issued in Feb for this. Each billion counts in the bottom line.

9. New management – New board, new ceo, more minority shareholder representation. The stalemate is over and things can get moving.

10. Presidential directive – All commercial state corporations should provide 80% of profit after tax for payment of dividend. It’s a long shot but if KP even issues something small, share price will skyrocket. CFO revealed the new board was asking him to budget something for minority shareholders.

11. No major power plant – No jump in capacity charges which are KP’s biggest COS charge.

12. IMF is watching like a hawk


Headwinds
1.ksh – each drop means added costs

2. Loans repayments – Biggest consumer of cash. Moratorium from govt is expiring

3. Government – Any directive can sink the ship

4. Procurement theft – This is where the biggest leakage is. Major projects = major theft. Currently, we have meters and more last mile.

5. Capital gains tax – Transferring assets to Ketraco may trigger a huge capital gains tax.

6. Negative working capital - its shrinking but just doesn't look good on the company.

7. New debt from world bank $300m interest free. It will ease cashflow pains but more unrealized forex losses again.

My target price is 3+ by June 2025 but this is highly dependent on the performance of the ksh. I will jump ship past 170. My current cost basis is 1.55, a price it has stuck to since the onset of the pandemic. So the downside risk is kind of muted. Not planning to hold long term because power utility growth is just 3 - 5% annually

Please criticize my overly optimistic view.